The Texas electricity market proved once again why it’s a leading innovator, and power customers around the world should pay attention.
Six months ago, critics predicted that Texans would suffer soaring electricity prices and rolling blackouts in what they predicted would be cruel summer. Generators had shut down expensive coal-fired power plants, raising questions about whether supply could meet demand.
The grid operated by the Electric Reliability Council of Texas relied too much on wind energy, the pundits said. Making matters worse, ERCOT only paid generators for the electricity it bought, providing few incentives to keep spare capacity.
Texans simply pay too little for electricity, these critics said, due to federal tax incentives that encourage wind farms. The Texas grid was a house of cards that would come tumbling down if the Summer of 2018 was hotter than average, they warned.
On HoustonChronicle.com: Too much energy creates a challenge for Texas
The Summer of 2018 was indeed one of the hottest on record. ERCOT, which meets 90 percent of the state’s electricity needs, set a new record for demand at 73.2 gigawatts. But the lights stayed on, and prices remained reasonable.
Texas’s lightly-regulated market, heavily reliant on renewable energy, worked as planned. The sky did not fall.
ERCOT is unique and widely admired by the global electric power industry. In 1998, Texas lawmakers did away with the traditional model of the government setting electricity rates and guaranteeing generators a profit margin. Lawmakers decided to make generators compete to see who could offer the lowest-priced electricity.
ERCOT is responsible for operating the market and overseeing distribution. When demand goes up and spare capacity shrinks, ERCOT pays higher prices to encourage more generation. Wholesale electricity in Texas averaged $28.25 a megawatt hour in 2017—among the lowest in the nation—but can legally go as high as $9,000.
Generators make their money when demand peaks in the summer and winter. Other markets encourage competition, but most pay generators to have spare capacity. Texas also has the most installed wind generation, which generates federal tax credits and suppresses prices.
“Both high temperatures and low wind in unison are needed to produce exciting price prints,” analysts at the financial advisory firm Morning Star concluded. “If those two factors don't combine, then ERCOT has enough generation, especially wind, to supply even record demand.”
Lower power prices, though, are tough on older coal-fired power plants built when politicians guaranteed profits.
Vistra Energy Corp. cited low prices when it shut down three coal plants last winter. The company took 4.1 gigawatts of generation off the ERCOT grid, enough capacity to power 2.8 million homes.
Vistra’s decision meant ERCOT generators would need to operate at 89 percent of capacity to meet Texas’ forecasted electricity needs. ERCOT prefers 14 percent reserves in case of an emergency. The slim reserve margin made traders nervous back in May, sending futures prices skyrocketing to $252 a megawatt hour.
In July, a string of hotter than average days set 14 of the top 15 hourly demand records in ERCOT’s history. Prices exceeded $300 a megawatt-hour during some 15-minute intervals, but average prices settled well below what traders had anticipated. Electricity bills were typical for a Texas summer.